Hey everyone it’s Finance Fridays again, as promised, today I’m going go talk about Suze Orman and the $5 million retirement.
Suze Orman and the $5 million retirement?
If you’ve been following finance stuff, then you’ve probably heard of Suze Orman. She’s written a bunch of finance books and was previously a financial advisor for Merril Lynch.
Recently, she came under fire for her commentary on the FIRE movement. Basically she said she “hates” it going on to say:
- “$2 million isn’t enough for early retirement. At a 4 percent withdrawal rate, that’s $80,000 per year.” This is isn’t enough to protect you ‘when the floods come.’
- “If you only have a few hundred thousand, or a million, or two million dollars, I’m here to tell you … if a catastrophe happens, if something happens, what are you going to do? You are going to burn up alive.”
- “You need at least $5 million, or $6 million. … Really, you might need $10 million,” she said — short of that, it’s just not going to be enough for most people.
What I find interesting is that she chose $5, 6 and 10 million. That’s actually pretty close to “my number” which was post tax $6 million without liabilities and $10 million pretax with all my current liabilities. However, I must remind you that there are Different Numbers for Different People.
I think that perhaps what she said was slightly taken out of context, because the amount of money needed to retire “early” at 55 is significantly different than retiring “very early” at like 30. You’re talking about an additional 25 years for which you don’t plan to be working.
Let’s boil it down to the real difference:
You have to plan for the worst case scenario. The best case scenario are even the “most common scenario” don’t matter here. If you plan to retire early at whatever age, your plan should be based around a worst case scenario with some of backup plan.
The earlier you retire, the more time you have to have a “worst case scenario” come up. As morbid as it may be to think about it, if you became injured and/or disabled in early retirement, the likelihood is that you would burn through your nest egg much faster than expected. Medical expenses will pile up, and you will be paying for your own care without the help of an employer health care plan. This would also effect your chances of trying to go back to work as well.
Suze Orman seems to be acutely aware of the costs of medical care, since she reports taking of her own mother in her old age. I think as a young individual of less than 40 years old, we likely underestimate how much health care costs add up as we get older. I also do not foresee these costs going down during my lifetime, only up. Even as a doctor I admit I am unaware of just how much health care costs increase as we age. I mean, I know it’s a lot, but I’ve never actually sat down and compared costs side by side.
It’s not just a once a year physical exam. You may be seeing a few different doctors a few times a month and be on multiple different medications. Then you may require additional imaging (CT or MRI) and/or require some small (or extensive) surgical procedures. All of these costs add up quickly.
Here’s the other thing…
The FIRE movement is not necessarily new… however, this aggressive FIRE movement of retiring at young then 30 is growing. I think the major concern with this movement is that while many will have planned again and plotted out worst case scenarios and backup plans to weather a down market — others may not. The worst possible situation would be to retire early only to run out of money and not have any work experience for more than a decade (or two!).
The other problem is that no one knows how much is “enough”.
The longer your time span of “not working” the more conservative your estimate of what “enough” should be is.
Out of all these younger than 30 year retirees that are happening right now — we won’t know how they did for another 30-40 years when they get to “normal retirement” age. Will they have enough money? Will they have too much? There are variables at play here. Was there any major stock market crash between 2018 and 2058? Did health care costs go up a little, or did they go up a lot? Did the tax structure change? Also, don’t forget about 30-40 years of inflation as well.
Like many things… context matters.
Where you retire to matters. How much money you spend matters. Health matters.
This is why I dislike talking about a particular number to shoot for. Everyone has a different situation and there is no magical number to shoot for. My $6 million is likely way too high for many people… however, because I am conservative and I have significant liabilities, that is the number I consider to be “safe”. Additionally, it’s not just “my retirement” it’s retirement for my wife as well, and I still have two kids to take care of for the next 13 years at least.
$5 million to retire? Too much? Too little?
It depends. Context matters.
When it comes to retirement at whatever age, we must concern the worst case scenario.
I think that the earlier you retire, the more conservative you must be.
Can’t we all just get along?
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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